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AAA SMART COURSE 2021-22
KASHIF KAMRAN –FCCA
Lecture 19
(BLOCK 4 LECTURE 3)
Objective: Forensic audit & Audit of performance info

Forensic Audit
Examiner mind-set and the scan of past paper
Dec 11 Q4 A/B Dec 12 Q4C Jun 13 Q2b Jun 15 SD2019
Ethical and 6 marks
professional issues
Matters Accepting a X Theft/ insurance X Before accepting
potential claim an engagement –
engagement 3 marks 8 marks
6 marks
Procedures X 4 marks 6 marks 4 marks 6 marks
Step in planning 3 marks
Deficiencies/ 6 marks
recommendation
Fraud discovery- 5 marks
management and
auditor difficulties

Student wants to excel in forensic should be strong at:

1. Procedures
2. Matters

Understanding – forensic audit

 Forensic audit – investigation (fraudulent activity/ bribery / criminal activities)


 Forensic investigation is an agreed upon procedure (Engagement) thus offer no assurance
 Forensic investigation is a fact finding exercise about: (Scope)
o Who did it?
o How it happened?
o Amount of loss?
 Auditor has to present a detailed report – about who did it? Amount of loss? And how it happened?
 The auditor report can also contain recommendation to avoid reoccurrence of fraudulent activity in
future

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Article:
A forensic investigation is a very specialist type of engagement, which requires highly skilled team members who
have experience not only of accounting and auditing techniques, but also of the relevant legal framework.
There are numerous different types of fraud that a forensic accountant could be asked to investigate. The
investigation is likely to ultimately lead to legal proceedings against one or several suspects, and members
of the investigative team must be comfortable with appearing in court to explain how the investigation was
conducted, and how the evidence has been gathered. Forensic accountants must therefore receive specialist
training in such matters to ensure that their credibility and professionalism cannot be undermined during the
legal process.
Note: When the audit firm is conducting a forensic investigation the steps are very similar to that of audit
with the exception of court proceeding
1. Acceptance decision
2. Planning
3. Gather evidence
4. Reporting
5. Court proceeding

Accepting the investigation


Additional considerations include whether or not the investigation is being requested by an audit client. If
it is, this poses extra ethical questions, as the investigating firm would be potentially exposed to self-review,
advocacy and management threats to objectivity. Unless robust safeguards are put in place, the firm should
not provide audit and forensic investigation services to the same client. Commercial considerations are
also important, and a high fee level should be negotiated to compensate for the specialist nature of
the work, and the likely involvement of senior and experienced members of the firm in the investigation.
If the engagement involve court proceeding – will the court proceeding give rise to an advocacy threat?

 Yes, why?
o Because presenting a client in a court proceeding is promoting the client business interest
o In forensic investigation, advocacy is permissible because its embedded part of engagement
Summary: Acceptance
1. Ethical issues- (Existing audit client)- self review/ advocacy/ management threat
2. High fees – versus special nature of work
3. Senior members in the team

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Definition

 Forensic audit – gather SAAE


 Forensic accounting- investigate FS for non-adherence to IFRS
 Forensic investigation – question / or identify the suspect or culprit

Past papers
2011- Dec Q4 a and b
(A)- Ethical and professional issues (Assignment)

(B)- Matters to be discussed with Jack

Explain the matters that should be discussed in the meeting with Jack Privet in respect of planning the
investigation into the alleged fraudulent activity.6 marks

Para 3:
I am very worried about the scale of this fraud, as travel and client entertainment is one of our biggest expenses. All of
the alleged fraudsters have been suspended pending an investigation, which I would like your firm to conduct. We will
prosecute these employees to attempt to recoup our losses if evidence shows that a fraud has indeed occurred, so your
firm would need to provide an expert witness in the event of a court case. Can we meet tomorrow to discuss this
potential assignment?’

Matters – to be discussed with Jack (Convert them to paras – assignment)

 Deadline for completing work / court proceeding


 Fees
 Any initial calculation performed on scale of fraud / estimation?
 Access to suspended employees? Because they are a source of evidence?
 Clarity on the scope of investigation?
 Assurance level- to avoid misunderstanding
 Do Jack need any recommendation on control?

Dec 12- Q4c- Procedures 4 marks (Assignment)

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June 13 Q2b

Required:
In respect of the theft and the associated insurance claim:
(i) Identify and explain the matters to be considered (3m), and the steps to be taken in planning (3m) the forensic
accounting service; and 6 marks
(ii) Recommend the procedures to be performed in determining the amount of the claim. 6m= 6procedures

Note: The total marks will be split equally between each part. (12 marks)

Answer
Matters – 3 m

Steps – 3 m

Procedures – 6 m

The audit committee of the Group has contacted Kennel & Co to discuss an incident that took place on 1 June 2013. On that
date, there was a burglary at the Group’s warehouse where inventory is stored prior to despatch to customers. CCTV filmed
the thieves loading a lorry belonging to the Group with boxes containing finished goods. The last inventory count took place
on 30 April 2013.
The Group has insurance cover in place and Kennel & Co’s forensic accounting department has been asked to provide a
forensic accounting service to determine the amount to be claimed in respect of the burglary. The insurance covers the cost
of assets lost as a result of thefts.
It is thought that the amount of the claim will be immaterial to the Group’s financial statements, and there is no ethical
threat in Kennel & Co’s forensic accounting department providing the forensic accounting service.

In respect of the theft and the associated insurance claim Identify and explain the matters to be considered (3m)

 Who did it? – Who is the suspect? Anyone identified?


 Any such theft from warehouse in the past
 What weaknesses exist in the ICS at the warehouse?
 Has the theft informed to the police dept?/ any recovery made
 Has the insurance company been informed of theft ?/ any replies from insurance company

Matter
-The audit firm should consider the weaknesses in the internal control system at the warehouse which resulted in the theft
on 1st June. The weaknesses will help audit firm to exactly identify the loopholes which will help them with their
investigation (1)

-The audit firm should discuss with audit committee whether any suspects have been identified or whether any initial
investigation has been carried out to identify the likely suspect. (1)

Q: the steps to be taken in planning (3m) the forensic accounting service – 3 mark

Kennel & Co should carefully plan the forensic investigation of the theft from the warehouse by carefully considering
planning matters:

-should carefully understand the scope of engagement in terms of relevant laws and regulation and the size of warehouse
and nature of inventory to perform an efficient investigation

-should develop a proper timetable to perform the engagement in line with the deadline given by the audit committee

-should consider developing a proper audit team with experienced team members to perform investigation as
investigation requires more senior team members

Student note: step in planning = block 3 planning= scope, timing, direction and resources

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Procedures- amount of claim

Brainstorming

Insurance claim - The insurance covers the cost of assets lost as a result of thefts.

Lorry –cost xxx

Finished good(inventory)- cost xxx

xxx

Less: recovery if any made by police (xxx)

Net insurance claim xxx

Procedures-

1. Agree the cost of lorry stolen to the purchase invoice or to the fixed asset register to confirm the cost. (1)

2. Discuss with audit committee whether any recovery has been made by police pertaining to lorry or the inventory (1)

3. Discuss with audit committee the basis underlying their claim that the amount will be immaterial or whether any initial
amount of claim has been worked out. (1)

4. Review cost card for laptop and mobile phone to confirm the cost per unit of a laptop and mobile phone.

5. review the dispatch list as of 1st June, to confirm how much quantity was to be dispatch on June 1st in relation to laptops
and mobile phone

6. Discuss with the warehouse manager any leftover inventory on June 1st at the dispatch location which was not stolen.

7. Watch the CCTV footage to confirm number of boxes which were loaded on to the lorry

8. Reconcile the inventory position as from April 30th to June 1ST to identify any discrepancies in the quantity as per physical
record of warehouse which can be the quantity stolen

Inventory stolen:

 How much quantity has been stolen?


 Quantity stolen * price per unit= cost of inventory stolen
o Incident on June 1
o CCTV filmed
o Last count took place on 30 th April

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Jun 15 Q4c – Procedures on alleged bribery payment - 4 marks (Assignment)

Sep Dec 19 Q3

Evaluate the matters which should be considered before your firm accepts the invitation to perform a forensic
investigation for Beyer Co. (8 marks)/ 2 mark per matter= 4 matters
Student note – This is a new client

Recommend the procedures which should be performed in order to quantify the inventory loss; and (6 marks)/ 1
mark per procedure= 6 procedure = CASP

Evaluate the deficiencies in Beyer Co’s internal control system, and explain how they contributed to the fraud,
together with recommendations to prevent such a fraud reoccurring. (6 marks)

STUDENT NOTE
 Identify a deficiency + explain the deficiency + how it contributed to the fraud = 2 marks per deficiency
 Recommendation - 1 mark per

Note: If you found 2 weaknesses it will be good to score 6 marks

Explain the difficulties arising for management and for the auditor with respect to discovering fraud. 5 marks

Management

 Fraud involve collusion


 Is done with perfection
 Due to lack of whistle blowing ( weak internal audit dept./ no internal audit dept)
 Systems might not be robust for discovering fraud
 Management override of control- management themselves are involve in fraud

Auditor

 Audit is done on a sample basis


 Audit is done on material basis
 Auditor has less time span when audit is performed
 Audit is done after the year end – when fraud take place during the year.
 Inexperience audit team

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Summary – forensic audit

1. Read the article forensic audit


2. There are a total of 5 past papers – Dec 11 to Dec 19 to be attempted
3. Be case specific to find answer to most of the forensic requirement – like matters, procedures etc.
4. Assignment:
a. Dec 12 Q4c + Jun 15 Q4c= procedures
b. SD19 Q3 in full

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OTHER ASSIGNMENT: AUDIT OF PERFORMANCE INFORMATION (PI)
Article: performance info in public sector (Must to read)
Understanding – Audit of PI

Past papers- to read the mind of examiner for this assignment

Dec 14 Q4b- 10 marks Dec 15 Q2B- 10 marks Jun 17 Q3b- 10 marks


Discuss Measuring & reporting – Measuring & relevance – 5 Difference between
4 marks mark performance audit and
audit of PI- 3 marks
Procedures 6 marks 5 marks 7 marks

Scope of audit of PI from exam perspective:

 Knowledge about (Examiner article)


o Measuring
o Reporting
o Relevance
o Difference between performance audit and audit of PI
 Procedure – Case specific.

Understanding of audit of PI

 Audit of PI not FS
 Difference is – the subject matter of this audit
 What is performance information? – is an information other than financial statements
o Dec 14- Social and environmental performance (private sector)
o Dec 15- University academic performance (public sector)
o Jun17- Hospital information (public sector)
 You need to perform procedures to confirm the validity of the performance information

Article:
Difference between performance audit and audit of performance information?
It is worth reiterating the difference between the audit of performance information and performance auditing as
both are likely to occur in the public sector. Candidates are reminded that the audit of performance
information is concerned with the audit of reported performance information against predetermined
objectives. The auditor’s role here is usually to report on the credibility, usefulness and accuracy of the
reported performance. Performance auditing is related to the evaluation of how the public sector body
is utilising resources and often focuses on determining how the public sector body is achieving economy,
efficiency and effectiveness, sometimes referred to as value for money auditing. It is the former that is
the focus of this area of the P7 syllabus.

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Audit of PI (Examinable)

Audit of performance information is concerned with the audit of reported performance information against
predetermined objectives. The auditor’s role here is usually to report on the credibility, usefulness and
accuracy of the reported performance
E.G.

The management has an objective of giving donation to local charities. During the year 2021 the management give
donations worth $500,000 to local charities.

Performance auditing (not examinable)

Performance auditing is related to the evaluation of how the public sector body is utilising resources and often
focuses on determining how the public sector body is achieving economy, efficiency and effectiveness, sometimes
referred to as value for money auditing.

Audit of PI

 Audit of reported performance against pre-determined objective


 Auditor need to ensure the usefulness, credibility and the accuracy of PI
 Assurance level:

Reporting on PI (Auditor)

There is no specific format or wording that is prescribed by international regulations for reporting on
public sector performance information, though in some jurisdictions the national regulators may
issue country-specific requirements.

Generally, the auditor will provide a conclusion on whether the public sector entity has
achieved its objectives as shown by the reported performance information and concludes
on the information itself. This conclusion may be in the form of a reasonable assurance
conclusion – ie an opinion is expressed, or may be in the form of a negative assurance conclusion
– ie no opinion is expressed. Essentially, in the absence of any jurisdiction specific requirements,
the auditor will agree the type of conclusion with the public sector organisation and usually its
regulating body.

 Is there any definite assurance level for audit report on PI?- No


 So the auditor performing audit of PI has to agree the assurance level with the client

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Procedures

Audit procedures may include:

1. Tests of controls on the systems used to generate performance information


2. Performing analytical review to evaluate trends and gauge the consistency of the information
3. Discussion with management and other relevant individuals, for example those responsible for the
reporting process
4. Review of minutes of meetings where performance information has been discussed
5. Confirmation of performance information to source documentation; this may be performed on a sample
basis
6. Recalculation of quantitative performance information measures

Student note:

 CASP- You need to adapt the list above versus the case
 Procedures= TADMSR = case specific

Agenda: Lecture 20 Block 4 lecture 4 (final)

 Reading of measurability and relevance


 Solving past paper Dec 14 / Dec 15
 Review of PFI

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